Sign On
  • Online Banking
    Sign On Form is Loading

Signed into law in 2017, the Tax Cuts and Jobs Act (TCJA) doubled the lifetime estate, gift, and generation-skipping transfer tax basic exclusion amount. However, the enhanced basic exclusion amount and many other provisions of the TCJA are set to expire after 2025.

Future legislative uncertainty creates an environment in which higher-net-worth households should consider making substantial gifts for the benefit of spouses and other family members before the end of 2025, or sooner if the new administration changes laws earlier.

Fortunately, there are trust vehicles available today that can help you prepare for the future and take advantage of planning opportunities. These include dynasty trusts, spousal lifetime access trusts, and self-settled domestic asset protection trusts.

Dynasty Trusts: Multigenerational Estate Planning

A dynasty trust is an irrevocable long-term trust for children and/or grandchildren that can incorporate flexibility to address changes that may occur over time. By funding a dynasty trust, families can preserve wealth for future generations, minimize estate transfer taxes, and protect assets from creditors of beneficiaries.

Potential Strategy: Trust terms can be written to enable a trust maker to:

  • Retain authority as settlor to change trustees.
  • Include trust terms that permit lending of trust monies to the trust maker.
  • Give a beneficiary the right to designate which of their descendants will be beneficiaries following their death.
  • Authorize the trustee to modify certain of the trust terms in the future.
  • Permit the trustee to add beneficiaries, such as charities or spouses of beneficiaries.

Considerations: A dynasty trust can be established as either a grantor trust or a non-grantor trust for income tax purposes. If set up as a grantor trust, the liability for income taxes shifts from the trust to the trust creator; a non-grantor trust may reduce or eliminate state income taxes. Trust creators have a wide degree of latitude in specifying the conditions for trust distributions, which can shape the future of a dynasty trust for generations to come.

Beneficiaries will not have the flexibility to alter the terms of the trust, even if family or financial circumstances change in the future. Some states have adopted the “rule against perpetuities,” which undermines the usefulness of dynasty trusts by limiting their duration. Also, there is no step-up in basis on assets at death, and families will need to balance estate and income tax savings.

Due to the multigenerational duration of the trust, a trust creator should consider using an institutional trustee. With its headquarters in Cleveland, Ohio, KeyBank provides clients with access to a range of dynastic and perpetual trust designs, self-settled trusts, and asset protection planning. In all cases, competent legal counsel should be retained to draft trust documents to ensure compliance with state laws.

Spousal Lifetime Access Trust (SLAT): A Planning Tool for Married Couples

It’s a common concern, one shared by many households: A married couple hasn’t used up all of their federal lifetime gift exemption and are worried that the exemption will be reduced with a change in administration or the sunset of the current estate tax exemption after 2025. They may want to use some of their federal exemption with a gift now but are concerned that they are giving up access to assets that could be needed for future living expenses. One technique that some married couples find useful in addressing these concerns is a spousal lifetime access trust (SLAT).

Potential Strategy: A SLAT is a gift from a donor spouse to an irrevocable trust for the benefit of the beneficiary spouse.

  • The beneficiary spouse can receive distributions from the SLAT, but the SLAT is designed to be excluded from the beneficiary spouse’s gross estate and is not subject to estate taxes when the beneficiary spouse dies.
  • SLATs are popular among married couples because the SLAT property remains accessible to the donor spouse through their spouse as beneficiary.
  • Typically, the beneficiary spouse is the trustee and has the ability to distribute trust principal to himself or herself for their health, education, support, and maintenance.
  • Upon the death of the beneficiary spouse, the assets remaining in the SLAT pass to children or other beneficiaries free of estate tax.

Considerations: SLATs can be created by both spouses to benefit each other. However, extreme care must be taken to avoid the IRS’s reciprocal trust doctrine and the step transaction doctrine that can cause the gifts to be challenged and undone. A knowledgeable attorney should be engaged to make the trusts sufficiently different so the doctrines will not apply. This can be done by creating trusts at different times, with different assets and trustees, with very different terms, and under the laws of different states.

SLATs are generally grantor trusts for income tax purposes, and the trust maker bears the income tax burden on trust income. Non-grantor SLATs can be used to save state income taxes. In addition, life insurance planning should be incorporated to address the risk of a premature death of either spouse.

Self-Settled Domestic Asset Protection Trust (SSDAPT): A Vehicle for Gifting and Retaining Access to Funds

Self-settled domestic asset protection trusts (SSDAPTs) enable a trust creator to take advantage of asset protection rules to remove assets from their estate without eliminating the possibility of benefiting from the gifted assets in the future. They may seek to gain creditor protection and potentially reduce or avoid state income tax. Both individuals and married couples can use an SSDAPT. An SSDAPT can provide an excellent vehicle for estate planning purposes for individuals for whom a SLAT is not available.

Potential Strategy: A trust maker can fund an SSDAPT in an asset protection jurisdiction.

  • The transfer to the trust by the trust maker can be a completed gift for gift tax purposes even though the trust maker is a potential beneficiary. In the case of a completed gift, this uses some of the settlor’s lifetime gift exclusion.
  • In the case of a completed gift, the assets of the trust are not included in the settlor’s gross estate at death.
  • Distributions to the grantor are entirely at the discretion of an independent trustee.
  • Under state law and the terms of the trust document, the assets of the trust cannot be reached by the trust maker’s creditors.
  • There should be no express or implied agreement that trust funds will be available to the trust creator (either via loan or trust distributions) in the future.
  • Upon the trust maker’s death, the assets pass to the heirs.

Considerations: An SSDAPT can be established as either a grantor or a non-grantor trust for income tax purposes. If set up as a grantor trust, assets grow without being reduced by income tax payments; a non-grantor trust may reduce or eliminate state income tax.

Given an SSDAPT’s complexity, knowledgeable legal counsel should be used to establish the trust. Your attorney will likely want to conduct a solvency test and document that no fraudulent transfer is taking place. An independent trustee is best suited to be trustee. Keep in mind that some states impose a gift tax or bring back gifts made within three years of death. In addition, the law is unsettled as to whether the asset protection advantages of an SSDAPT will be respected if the creator lives in a state that does not have an SSDAPT statute.

Strategies at a Glance

Dynastic Trust

Spousal Lifetime Access Trust (SLAT)

Self-Settled Domestic Asset Protection Trust (SSDAPT)

An irrevocable long-term trust for children or grandchildren that can incorporate flexibility to address changes over time. Settlor retains indirect access to trust assets if the trustee of the trust can make loans using trust assets.

A gift from a donor spouse to an irrevocable trust for the benefit of the beneficiary spouse. Donor spouse retains indirect benefit from trust distributions made to the other spouse. Can also name children and grandchildren as additional beneficiaries as well.

A trust that enables the maker to remove assets from their estate without eliminating the possibility of future benefits from the gifted assets while gaining creditor protection and potential tax savings.

Benefits

Under current law, if allocation of lifetime gift exemption and Generation Skipping Tax (GST) exemption are used, the trust would not be subject to estate transfer taxes for future generations.

Future appreciation is not taxed in either the settlor spouse's estate or the beneficiary spouse's estate.

A trust maker may be a discretionary beneficiary of the trust and retain the ability to access assets in certain circumstances.

Assets may pass to subsequent generations free of a generation-skipping transfer tax.

Assets in a SLAT avoid probate, which should reduce probate costs and time delays.

Creditors — including future ex-spouses should the trust maker marry and divorce after establishing the SSDAPT — cannot access trust assets.

Investment control over trust assets can be retained.

SLATs can be drafted with considerable flexibility to address uncertainty with future tax rules.

Unlike a SLAT, the creator of an SSDAPT does not have to rely on a spouse as part of the strategy.

Grantor Trust: Assets may accumulate in the trust without being reduced by tax payments; the income tax liability is borne by the trust maker.

Non-grantor trust: State income taxes on trust income can potentially be avoided.

Grantor trust: Assets may accumulate in the trust without being reduced by tax payments; the income tax liability is borne by the trust maker.

Non-grantor trust: State income taxes on trust income can potentially be avoided.

Grantor trust: Assets may accumulate in the trust without being reduced by tax payments; The income tax liability is borne by the trust maker.

Non-grantor trust: State income taxes on trust income can potentially be avoided.

Indirect access to trust assets is retained.

Income tax planning opportunities can be provided with basis maximization.

If children and grandchildren are additional beneficiaries as well, assets may pass to subsequent generations free of generation-skipping transfer tax.

For more information, please contact your Key Private Bank Advisor.

Publish Date: March 2, 2021

Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

Investment products are:

NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY